EBA misses the point on encumbrance

By Bill Thornhill
25 Mar 2014

The European Banking Authority’s effort to improve transparency on balance sheet encumbrance has come to nothing. The draft guideline, which will be finalised by June, is practically useless because it doesn’t include emergency central bank liquidity, which is the largest and most important source of encumbrance. But that’s probably just as well, for if this disclosure became public knowledge, it would create just the sort of negative feedback loop that brought down the UK’s Northern Rock.

In May last year the Bank of international Settlements suggested bank regulators should seek to limit the level of balance sheet encumbrance among their charges. The BIS said it was concerned that high levels of asset encumbrance would cause the burden of resolution or insolvency to borne unduly ...

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